If you have employees, then you need to carry workers'
compensation insurance. That's the law. Unfortunately, many
small business owners don't know a lot about their workers'
compensation commitments. It's to your benefit to understand
how workers' comp works, where you can get it, and how much it
will cost you.

Below are some of the most commonly asked questions about
workers' compensation.

What is workers' compensation?

Workers' compensation insurance, often called workers'
comp, covers your employees when they are made sick, injured or
killed on the job. Benefits include medical expenses, lost wages,
vocational rehabilitation, and death benefits.

For example, if you had a painting company and one of your
employees fell off a ladder, your workers' comp coverage would
pay the medical bills, any necessary physical therapy, and roughly
two-thirds of the wages lost while the person recovers from the
injury.

Workers' comp exists both as a way to benefit injured
workers and as a way to protect employers. Before workers' comp
laws existed, serious injury to an employee could bankrupt an
employer. Workers' compensation is a no-fault insurance system.
Negligence on the part of workers or employers is not an issue in
paying benefits.

What companies need to have workers'
compensation?

In general, if your company has employees, you need to carry
workers' comp insurance. Requirements vary from state to state
- each state has its own workers' comp laws, as well as its own
administrative and legal structure for handling claims and
disputes.

Several states don't require workers' comp insurance for
very small companies - those with fewer than 3-5 employees. Sole
proprietors and partnerships are also usually exempt. Think twice
before you exercise this option. Without coverage, you may be sued
by an injured worker for medical and disability costs, plus
damages.

Some states also require workers' comp only for employees in
"hazardous" occupations. What falls under the
"hazardous" category, however, can vary widely, so speak
with your state agency or your insurance broker for information on
which employees you must cover.

There are some professions that are usually exempt from
workers' compensation coverage. These include farm laborers and
domestic workers.

How do I find out my state's workers' comp
requirements?

Since workers' comp requirements are set by the state
government, they can vary greatly from state to state. Call your
state's insurance commissioner's office. You should be able
to find the phone number in the government pages of your telephone
directory.

Your insurance agent or broker should also be able to provide
details of your state's requirements.

How do I purchase workers' comp?

In most states, employers may buy their workers'
compensation insurance from a private insurance company. This is
often referred to as the "voluntary" market for
workers' comp.

However, workers' comp is available only through a state-run
fund in six states - Nevada, North Dakota, Ohio, Washington, West
Virginia, and Wyoming - creating a virtual monopoly. If you live in
one of these six states, you have no choice but to buy your policy
from the government-run fund.

Another 13 states operate government-run funds that compete with
private insurers; you have the option of going to either. They are:
Arizona, California, Colorado, Idaho, Maryland, Michigan,
Minnesota, Montana, New York, Oklahoma, Oregon, Pennsylvania, and
Ohio.

Although you must have workers' compensation coverage,
private insurance companies are under no obligation to sell it to
you. They each have their own underwriting guidelines and regularly
reject business.
Rejection usually occurs for one of three reasons:

High risk - Some industries, such as construction, roofing and
window washing, are considered high hazard. The higher the hazard,
the greater the potential for costly claims.

High claims history - Companies that have a history of high
workers' comp claims activity will find it difficult to find
insurance from private companies. Insurers maintain that this level
of claims indicates a lack of attention to safety.

Small size - Start-ups and many small businesses find
themselves being rejected because they are either too new or too
small. Insurers maintain that these companies are difficult to
insure and they can't make a profit from small policies.

If my company cannot get workers' comp coverage from a
private insurer, where do I go?

Every state has a mechanism for providing workers' comp
insurance for companies that can't get it elsewhere. In most
areas, it comes in the form of an "assigned risk pool"
that acts as the workers' comp insurer of last resort.

If you use the assigned risk pool, you must apply for coverage
with the state agency that administers workers' comp.
Applications are then assigned to an insurance company that agrees
to do business with the assigned risk pool

You do not want to be in the assigned risk pool if you can avoid
it. Assigned risk plans almost always cost more than private
insurance, and you will probably receive poorer service and less
attention.

How are workers' comp costs determined?

There are three primary factors that will determine your
workers' comp premiums:

Classification - Most states use a classification system
developed by the National Council on Compensation Insurance that
lists more than 600 different types of businesses. Each business
classification has its own premium rate stated in dollars and cents
per one hundred dollars of payroll. The higher the hazard
potential, the higher your premium. Watch your classification
carefully. If your company is misclassified - a home furnishings
designer who makes decorative pillows who is listed as
"bedding" manufacturer, for example - you may end up
paying higher premiums than you have to.

Location - Rates for the same classification vary from state to
state, and even within states. Much of this has to do with the
disability benefit levels that each state law requires. Again,
higher weekly benefits mean higher rates.

Experience rating - If you pay more than $5,000 in annual
workers' comp premiums, your rates will be affected by your
claims history. Insurance companies use what is called your
"experience rating," which compares the claims history
for your company to that of other companies in your industry
classification. The greater your number of claims, the higher your
premiums.

The views
and opinions contained herein are not necessarily those of American
Express and are intended as a reference and for informational
purposes only. Please contact your attorney, accountant or other
business professional for advice specific to your
business.